What Is the Tax Classification on a W9 Form?

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It is so ironic that America, as an independent nation was formed in part because of the insufferable taxation suffered by early colonists at the hands of the British monarchy. Ultimately, we declared our independence from Great Britain. Several hundred years later, taxes are once again a big part of our lives. At least once a year we are called up to file our taxes with the Internal Revenue Service. Your federal tax classification on any IRS tax form is important so that you pay the correct amount of taxes on your income.

Understanding the W-9 Form

The IRS W-9 form bears resemblance in many ways to the IRS W-4 form in that it is used to gather taxpaying information about you. Officially, the IW-9 form is known as the Request for Taxpayer Identification Number and Certification. If you have ever done any freelance work for a company, you most likely have completed this form. Companies use this form to get taxpayer information from their independent contractors and freelancers so their vendors can take advantage of W-9's classification options and the companies can accurately report earnings to the IRS at the end of the year.

Different Types of W-9 Filers

Ever since the Great Recession, the number of people who are working independently of an organization has increased. This includes people who offer their services, such as writers, IT professionals or management consultants on an independent basis. Most of these professionals work as independent contractors or freelancers.

As a freelancer or independent contractor, reporting your income to the IRS isn’t the same as it is when you work directly for a company. Your obligation to pay your taxes to the Internal Revenue Service remains the same, while the companies you work with maintain an obligation to report your income. But instead of using the IRS W-4 form, you will now use the IRS W-9 form. And, as always, you must make sure you are using the proper tax classification to ensure you pay the proper taxes on your income.

Federal Tax Classifications: The Basics

In short, federal tax classifications identify how you or your company want to be classified for tax purposes. On the Internal Revenue Service W-9 form, you can choose the tax classification that best suits your situation. For example, most freelancers and independent contractors operate as individuals or sole proprietorships, so their earnings are taxed at the rate for individuals. They would select individuals/sole proprietorship as their federal tax classification.

From a business perspective, business tax classifications are a matter of how you want to be treated by the Internal Revenue Service from a tax perspective. How much do you have to pay in taxes, and how do you want your company to be viewed by the IRS?

Other tax classification options include:

  • C Corporation.
  • S Corporation.
  • Limited Liability Corporation (LLC).
  • Partnership.

Understanding Your Federal Tax Classification Options

The tax classification options can be broken down a little further. For example, a C Corporation, an S Corporation and a Limited Liability Corporation are three different types of corporations, each with different benefits. One big difference is in taxation. C Corporations pay corporate taxes, but S Corporations do not pay corporate taxes because the owners of the company pay taxes as individuals on their own tax returns. The owners of an LLC report their share of profit and losses on their individual tax returns, as well.

Making a Final Decision About Your Federal Tax Classification

The rules for determining which classification best suits you or your company can be quite complex. Therefore, it is always best to consult with a tax professional to determine the best path forward for you and your business.

References

About the Author

Melissa McCall is an accomplished lawyer, science journalist and legal analyst. She graduated cum laude from Syracuse University in 2003 and spent two years as a Judicial Law Clerk, followed by 2 years at a general litigation firm and a brief stint as the Director of Environmental Protection for the Virgin Islands. Since leaving the US Virgin Islands, she has worked as a legal recruiter, legal writer and legal analyst.

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